The origin of the wave analysis theory

In this article we will speak about one of the methods of technical
analysis which is now one of the most popular among some traders – wave analysis. Let's
consider the basis and the origin of this method in details.

...Elliott has almost predicted the foundation of modern science about nature
processes based on the fractional principal...

The History of Elliott Wave Theory

The wave analysis was founded by the world-known author and analytic Ralph Nelson
Elliott 1871–1948. He is also an author of a series of articles and a book which has
become a bestseller called "Nature’s Law – The Secret of the Universe" published
in 1946. According to Elliott's point of view the chart of price changes of market
instruments has a wave structure. And the form of price fluctuations is nothing else but
a chart which shows the changes of psychological mood of the crowd (market
participants). A person is often driven by emotions especially if he is a trader. And
quite strong emotions are revealed in the branches of human activity which are connected
with finances where there is a possibility of both loosing your funds and making profit.
Trading on the commodity and stock markets can be also attributed to such branches.
Later, from the end of 70s of the last century the Forex market has been also included
to them. Human emotions gradually change from optimism to pessimism, from euphoria and
belief in the future through uncertainty to disappointment, fair and panics while
trading. Sometimes even such negative emotions as fair and greed control the market
participants that's why absolutely unexpected changes of the price of the trading
instruments may take place on the market. These changes look like waves on the chart of
price fluctuations. Elliott argued that there is a limited amount of wave models
(patterns). He paid special attention to the sequence of Fibonacci numbers.

The Basics of the Wave Analysis

The main elements of Elliott's wave theory are geometry and arithmetic of Fibonacci
numbers. According to him, there is a specific clear logic in rotation of waves, which
gives an opportunity to predict future changes in the mood of the crowd and to forecast
price changes in particular. The major role in the structure of price movement play five
motive and three corrective waves.

Another feature of waves and wave models is their ability to form great price movement
and create larger wave models using the set of simple waves similar to them, this fact
shows the fractional nature of the waves. Thus Elliott has almost predicted the
foundation of modern science about nature processes based on the fractional principal in
half a century. Using this science it is possible to identify and describe clearly the
components of graphical models, waves which repeat in the market conditions. Elliott
himself and his followers named and illustrated the models, described the relationship
between them. This phenomenon was dubbed "Wave principal" by him. Nowadays wave
principle is not a science yet but it seeks to this level. And it is quite possible that
Elliott's wave theory will become a full-fledged science in the near future.

However there is a mistaken belief that the Elliott's Wave Principle can be used only
for analysis of the market and the price fluctuations of the trading instruments. This
belief radically reduces the value and prospect of the theory. Elliott meant human
activity and market activity is only one of its segments. In addition to that some
problems with application of Elliott's theory were caused by the great amount of
interchangeable terms which appeared because Elliott's books and the ones of his
followers were translated by different people at different times. That's why a lot of
criticism has been aimed at this theory. Let's hope that all these problems will be
solved and the Elliott's theory will get even more distribution among traders.

JustForex is a retail Forex broker that provides traders the access to the foreign exchange market and offers great trading conditions on accounts such as Classic, NDD, ECN, BitCoin, a wide choice of trading instruments, a leverage of up to 1:2000, tight spreads, market news, and economic calendar.
IPCTrade Inc. is authorized and regulated by the Belize International Financial Services Commission (license no. IFSC/60/241/TS/16).
Please note: we do not provide services for U.S. residents and entities of any kind.
Margin trading on the Forex market is speculative and carries out a high level of risk, including full loss of deposit. You must understand this and decide by yourself whether this type of trading fits you, considering the level of knowledge in a financial area, trading experience, financial capabilities and other factors.